I came across an amusing tweet earlier this week. Captured in one single diagram were the oil price predictions surveyed from economists around the world for the past year. The problem was that every single prediction turned out be dead wrong. Take a look. https://twitter.com/TheStalwart/status/544505943942512640 What this tweet demonstrated was — making oil price forecasts is rather futile. But why is that so? Jason Zweig explains in his book Your Money and Your Brain, that predictions in general tend to fall prey to two main problems: First, they assume that whatever has been happening is the only thing that could…
I came across an amusing tweet earlier this week. Captured in one single diagram were the oil price predictions surveyed from economists around the world for the past year. The problem was that every single prediction turned out be dead wrong. Take a look.
— Joseph Weisenthal (@TheStalwart) December 15, 2014
What this tweet demonstrated was — making oil price forecasts is rather futile. But why is that so? Jason Zweig explains in his book Your Money and Your Brain, that predictions in general tend to fall prey to two main problems:
First, they assume that whatever has been happening is the only thing that could have happened. Second, they rely too heavily on the short-term past to forecast the long-term future.
That’s seems to have happened with the economists’ forecasts as well. The failed predictions suggest that we shouldn’t even try to do it. So what should we do instead?
Let’s ask Warren Buffett
It turns out that economic forecasts has been around for ages. Investing maestro Warren Buffett knows this well. As the Chairman and Chief Executive Officer of Berkshire Hathaway Inc., he wrote this in his 1994 letter to shareholders:
“We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.
But, surprise – none of these blockbuster events made the slightest dent in Ben Graham’s investment principles. Nor did they render unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist.
The key here is that the principles of good investing do not change with the times. Oil prices may continue to be unpredictable, but businesses such as Old Chang Kee Ltd (SGX: 5ML) will continue selling its curry puffs. And retailers like Dairy Farm International Holdings Ltd (SGX: D01) will continue to welcome customers to its stores everyday. As Buffett counsels, Foolish investors would instead be better of identifying fine businesses, and try to buy them at sensible prices.
Foolish take away
The choice is with the Foolish investor on where he or she wants spend their time on. Oil prices may be continue to fluctuate and be unpredictable, but taking the opportunity to discover fine businesses should continue. If the current oil price rout presents us some fine businesses at sensible share prices, then we may choose to invest. If not, then we should patiently await for the right businesses to come along.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Berkshire Hathaway.